MPLS 2040 comprehensive plan and how landlords can add more units

33 Replies | Minneapolis, Minnesota

I am participating in the MPLS 2040 comprehensive plan by attending meetings and provided feedback that can be a big win for both landlord owners and renters in Minneapolis. I am an advocate of changing our current ADU ordinance as part of the MPLS 2040 comprehensive plan guideline to allow up to 4 plexes throughout the city. The change would be to allow non owner occupants the ability to add an ADU to their current 1-4 unit properties where currently only owner occupants can add an ADU.  Portland has been a trailblazer in opening their city to landlord/owners adding an ADU and has increased the building of ADU's from 24 units in 2009 to 615 in 2016.  Minneapolis could do the same thing.

In my case, I own 12- 2 and 3 unit buildings and would add a 1,000-1,300 sq ft ADU to everyone current property. It's new construction without the land costs and there really isn't any more land available. I'm a general contractor so adding a new "carriage house/ADU" of 2-3 bedrooms would add new housing in high demand areas where renters want to live. The financial equation works out better than a 1% rule as it comes in at a 1.1-1.2 % rent to cost of building and the apartment is brand new so you wouldn't expect any initial CAPEX. It is literally impossible to find a 1% deal in a good neighborhood in Minneapolis.

One action point is for every landlord/owner/investor to log onto the city's MPLS2040 plan and leave feedback that you want to see the ADU ordinance changed to include owner/landlords in adding ADU's as part of the comprehensive plan.  See link below:

@Bruce Runn that would be HUGE!!! I see probably 2, maybe 3 properties where I would add this. One of them I can't wait to do this to. The garage is on its last leg and needs to be rebuilt, and that property is just 1 short block from Lake Calhoun.

If we can get as many people to go on the city of Minneapolis MPLS2040 using the link above, it makes a big difference. We could add an ADU for approx. $180,000 and it could generate between $1,600-$2,000/month. You wouldn't be able to achieve those returns buying something new since you are building on a property you already own the land.

Just commented.  This sounds like a win-win if they can change it.  Investors are willing to put more money in certain areas and the city also wants to increase the amount of housing.

If they take off it would be interesting to see what impact ADUs will have on house prices in a few years. For investor grade properties it may work well but for owner occupant properties adding an ADU at the costs listed may not pay off. Will vary largely by location.

I have a couple clients planning to add ADUs at their primary residence but I am not sure what their projected costs or rents are yet.

@John Woodrich

I've talked to numerous people who are doing ADU's at their property and there seems to be a big difference in the scope of what they put into it. If the ordinance can be changed to include non owner occupied units, there are over 12,000 SFH that are used as rentals and over 23,000 duplex/triplexes that could add ADU's. I'll post a like as I'm having an article written in a Minneapolis housing/transportation blog shortly. I'm wouldn't build these as a level of someone's private house but rather rental grade which is still nice but not custom everything. Still with granite/stainless steel, just not $15,000 cabinets and high end finishes.

@Bruce Runn the couple clients I have are looking to add them to their single family properties.  One of them is considering a container home :)  

We were going to discuss the details before starting but both travel quite a bit so at this point it isn't looking good for this year.

There's an open house tonight at the new YMCA in Downtown Minneapolis at 5:30 hosted by the City of Minneapolis to discuss Minneapolis 2040. It will likely be a good forum to express opinions to the city planners. Maybe I'll see some of you there!

If you can't make it tonight, there will be another on 5/31 at Powderhorn Rec Center

I have a neighbor doing a modular  home which is container sized so it can be lifted onto a garage- he’s hoping to roll it out as a modular adu for others to use

I love it, the lender in me wonders how the ADU's will impact appraisals and therefore lending to the average buyer. I'm not talking about the experienced guys like @Pavel U. , @John Woodrich , and @Bruce Runn  I know you all will continue as normal, but for those who are not in a portfolio market, owner occupants etc lending on these properties will be interesting in the future.  Are you guys interested in a small one-off meet up about this?  Nothing advertised just a high-level discussion on how to give the best input to the city?  I'm thinking 4-8 of us that understand the impact it could have and what will be important that the city will likely not consider.

I'd be game to meet, no one has addressed financing yet but it will have to come around as there definitely will be a market- it would be interesting to know how it's handles in Portland. They built over 600 ADU's last year. I'll link my article as soon as it's published

@Tim Swierczek I may be able to meet, let me know if you set something up.  CPA hours and my drive to and from the cities really kills my day so I do most of these on the phone now to keep my wife off my back.  I roll out of tax season with a lot of deferred RE work so it seems I don't gain any time.

My general thought is that it won't affect portfolio loans much because the ADU will likely cash flow enough to pay the debt but on the residential side it will be interesting. I think it will be an appraisal issue on the residential side because there will not be a lot of comparable properties and residential loans typically do not consider cash flow.

@John Woodrich I completely agree there will be no effect on portfolio loans, but there will be an impact on conventional loans.  In the short term this could the savvy guys but in the long run, it will affect resale values.  Because access to readily available financing is the first tenant to appreciation.  

We are on the same page Tim.  I think it will be an issue in the beginning for conventional loans.  It will be hard to value the property from a comparable approach which is why I think resale could be an issue for these. 

@Matthew Smith any insight on how you think the appraisal process would work for these?

If you meet it may be good to invite Matt as he is an experienced appraiser.

In Portland, the city is funding some of these places as a way to house homeless people. One of my employees said he was approached by the city about this and said his neighbor is doing it across the street. From what he said to me, the city was going to build some at their own cost to house people. After a certain timeframe passes, the ADU would become property of the homeowner. I'm sure this is not all of the growth, but it is another aspect that is interesting there.

I'm not sure how Minneapolis would address it from a zoning perspective, but many homes have very small lots which may limit where they can be placed without turning a garage into an ADU. I'm curious how this would impact parking in snow emergency situations as well.

No chance of that in MPLS but our typical lot is between 5-6,000 as ft.   They’re committed but not nearly as much as Portland as Portland  obviously allows non owner occupied units

I know MPLS will not help fund these, but Portland's situation is a little different as they have helped subsidize the program.  That has helped with a lot of the growth.  

Somewhat relevant article on the differing views across the city related to the comp plan: 

Sorry I've been out of town... But John & Tim have valid concern with regards to ADU on typical single family property with regards to appraisals. I did an appraisal earlier this year in NE Minneapolis for a sale of a single family home that had a small ADU detached in the backyard. It was the size of a standard one car garage, heated and had a full bathroom along with what one could call a very small kitchenette. There was no market data to show/warrant that this ADU added any market value. Without any market data the Banks underwriter would have cut the appraisal apart. In this case the underwriter would have required that this ADU first show that the city of Minneapolis would grant a rental license too just the ADU. Which I'm not sure if the Buyer was able to acquire. The Seller was simply using the space as a home gym. On small multi family income properties i could see this being less of a issue as this properties would already have rental license.

@Matthew Smith

@Tim Swierczek

Since Portland has had over 1,000 adu's built in the past 2 years, there is plenty of precedent for appraisers to go with.  In my case, I'll give an example of one of my properties as an example.  I bought a property last year that included 2 duplexes on a triple lot but was all on one parcel.  It's an anomaly since two structures on one property isn't inside the guidelines.  The appraiser used the most common next step which was doing the appraisal as a four plex since there are 4 individual units.  I was happy with how it came in and this appraiser has done several of my places and is very good.  My bank has no issues with this.

If you have a duplex and add a detached ADU, you have the same situation. The comps would be a triplex and since the ADU portion is brand new, I should have a very good appraisal since I'll also have my construction cosst which gives you exact documentation. I'll also have cash flow. Options would be: do this as a construction loan with a conversion at the end, I may put it inside one of my heloc's, or take a second/heloc on this property for the additional mortgage.

I've been in contact with people in Portland and they have banks that are very comfortable and it's just finding a mortgage person who wants to take advantage of this niche that could produce a lot of loans.

@Bruce Runn   You are totally overestimating the traditional mortgage market.  I agree that there are lenders will do these.   I'm one of them and you know plenty, but I acknowledged that in my first post.  The issue will be with everyone else, and I can tell you from 15 years of experience on this side of the aisle that the average 2nd buyer of these properties will have issues financing them unless Minneapolis puts specific language in their ordinances.

Bruce, I fully agree with respect to small multi-family income properties. If you have a small multi-family income property, where you can increase the number of units from say two to three, or any combination of from two up to around six, it makes complete sense to appraise the property at it's highest and best use. Like in your case, viewing two duplexes on a single PID lot as a four-plex. But my point was in regards to single family properties, where the owner now wishes to add an ADU to there property. As Tim Swierczek has pointed out this, this will likely have more issues with traditional lending. I could see some pushback from the City as neighborhood start to complain about the increase in the number of multi-family rental properties popping up. Plus if the City doesn't grant a property to be used as a small multi-family rental property, then you're stuck with a single family property that now has ADU which could be seen as an over-improvement.

Hi Everyone. I'm a new investor but have been keeping an eye on the MPLS 2040 plan for the last few months. Looks like the city will be recommending a [reduced] cap of 3 ADU's on a single family lot in the most recent executive summary and it’s unlikely to change before the vote in early December.  For those considering adding a unit to an existing property, are you still considering this a win?

Overall the MPLS 2040 plan is certainly more tenant friendly and while I don’t oppose such protections especially in light of unscrupulous landlords, I am wondering if Mpls is at risk to making it unfriendly to investors?

Curious as to what opinions the rest of you have on this topic?   Thanks.

@Eric Wiechman

@Tim Swierczek

Actually, the 2040 comp plans allows a triplex on any lot, anywhere in the city, not a cap of 3 ADU's on a single lot. What it will do is allow 1 ADU to be added to any current SFH or duplex. This is a major advance to add new housing especially in current duplexes so you essentially get 3 rental units. Here is a link to an article from this summer.

If I was a mortgage broker, I would find/instigate how to finance these as there will be a demand without many people understanding how to provide initial financing.  

Once the 2040 comp plan is passed and they begin working on the zoning change for ADU's, I will have my architect draw up a rendering/schematic lthat can be somewhat universal and start the process.